Earnings Call: Q3 2021

Oct 25, 2021

Welcome to the RATOS Audiocast for Teleconference Q3 2021. For the first part of this call, all participants will be in a listen only mode. And afterwards, there will be a question and answer session. Today, I'm pleased to present Jonas Wisschom, CEO. Please begin your meeting. Thank you so much, and good morning and warm welcome to all of you On this earnings call targeting the interim report for Ratus' 3rd quarter. My name is Jovran Zwistram. I'm the CEO and President Overatos and by my side, I have our CFO, Jonas Oggrupp and our new VP for Sustainability, Josephine Uplink, who joined us and our management team during Q3. We have actually seen an Increasing interest for Ratus and Ratus share. And I believe some of you are with us for the first time. We will therefore start up with some comments and clarifications from Ratatos before we head into the results for the Q3. So I Ask you to move to Slide number 2. As of this quarter, Ratas is no longer an investment company. And Jurgen Sorgrup will come back to this in his presentation. We want to own companies that are or can become Market leaders, I think this differentiates us from other company groups. We have strong brands and we have Companies that can serve as a platform for more add on acquisitions. We live our core values, and we believe strongly in a decentralized structure In Ratus and our companies, both of them, our 12 companies Have a total turnover of some SEK 34,000,000,000. In Ratatos AB, we are today 18 employees. Actually, when I started here a couple of years ago, we were 53. And today, we have a different competence mix than was the case when we were an investment company. So moving to Slide 3. We are a business group that have our headquarters in the Nordics, But we are actually present globally with sales locations and manufacturing locations In Europe, North America, South America, Asia and even Australia. So let's move to Slide number 4 and look at the 5 year summary for the Ratus Group, not the company group, but the Ratus Group. I'm really proud of the turnaround journey that has been a prerequisite for starting our growth journey with acquisitions as a very important component. So let's move to our financial targets. We have a target of Having an EBITDA to at least SEK 3,000,000,000 by 2.25. We have a conservative leverage target. And since a couple of years, we have a new dividend policy. So with that, We move to Slide 6 and come into the Q3, where we improved the earnings In our companies, we had a strong order intake, and we have 2 new acquisitions. Page 7 is a summary of the consolidated EBIT In Ratatos, that is improving. We have A impact from unrealized costs related to revaluation of Dun and Bradstreet shares. We believe in these shares, and it was a result of investing a part of what we gained from this note sales. During the quarter, we also had An unusually high tax rate since the unrealized cost is not deductible. The adjusted EPS for the quarter was actually up 61%. So and we also had A significant improvement of net financial items, which Jonas Holger will come into later. So with that, let us go into our company group on Page 8 and our business areas. So sales and EBITDA in the current company group continues to grow despite All the challenges we have right now in the world, organic growth are up 2% and adjusted EBITA is up 3%. This in what I would call CME post COVID times, the challenges I talked about, You know all about them. Freight costs up almost 2,000 percent from freight from Asia to Europe. Lack of components and materials, we have low vaccination levels in Asia in some of the countries we're bringing in Goods from and we also have a ship wharf in Thailand, as you might know. 6 out of 12 companies Are actually growing EBITDA by 59% or more, and 9 out of 12 companies is improving their EBITDA. Our cash flow is impacted by Plantarsen, Which is then they are increasing their stock to ensure that we can meet customer demand in the coming Not only the Christmas season, but also the early spring, we are now in a situation where Just in time sort of have been replaced by stock is king. So I'm very satisfied with that increased stocking Plantation. Last, but certainly not least, we Have a very high M and A activity, and 2 acquisitions have been made in Q3. These 2 are contributing with yearly revenues of more than SEK 1,000,000,000. If we look year to date, we have acquired 6 companies with an estimated annual revenue on roughly SEK 1,900,000,000. So I'm Pleased, really pleased with the EBITDA and sales and acquisition development in the company group. Now I want to leave to you, Jonas Oggrupp, to take us through Slide 9. Okay. Thank you, Jonas. I will talk a little bit about the leverage and also the centralized financing that we have been working to set up during the last couple of quarters. If we look at the net debt for Ratatos, it continued to decrease to the net cash position of SEK 1,600,000,000 in the Q3 this year compared to actually net Debt of SEK 2,600,000,000 in the Q3 last year. And leverage was, of course, impacted positively by the divestment of this note in the beginning of the year. If we look at the leverage net debt to EBITDA, we were at minus 0.9 times in the quarter. And in the same quarter last year, we were at 1.4 times. Cash flow from operations were negative, minus EUR 56,000,000 last year, EUR 205,000,000. And in the Q3, We were impacted by Pantarcen actually taking steps to secure seasonal inventory on account of supply chain challenges. And what we have seen, as you probably all know, is low freight capacity mainly out of China to Europe owned and consequently much higher freight costs. If we look at our financial position, today we have a possibility To make acquisitions of roughly SEK 9,000,000,000 with maintained leverage at or below 2.5 times, which is in line with our financial targets. In the quarter, leverage decreased to minus 0.9 times despite acquisitions of almost SEK 300,000,000 in the 3rd quarter. Ratus is a company group and a treasury function is now in place. And we have also a new RCF agreement signed with 3 external banks With the possibility to borrow SEK 3,000,000,000 and group cash, we also have been setting up a group cash pool between Ratatos and the group companies, and this will be in place during the Q4 this year. If we look at the contribution of the centralized financing so far, we have positive interest cost savings of approximately SEK 16,000,000 SEK in the Q3 this year. And on a yearly basis, we estimate savings to be approximately SEK 75,000,000. And in the Q4, 2 more companies will be in the group will be financed via Ratas. So we will add financing of roughly SEK 250,000,000 in the 4th quarter. Ratus is a company group. And as of the beginning of August this year, Ratus is also from a tax Point of view and operating groups and what we say in Sweden, Roar is a givandebuglag and not an investment company anymore. This means that Ratus will no longer be taxed as an investment company. Ratus has SEK 13,900,000,000 in loss carry forward with a value of SEK 2,800,000,000 at current tax rate, Which means that profits generated by Ratatos AB will not be taxed as long as the loss carry forward remain. Back to you, Jonas. And that's good tax news, Jonas. Thank you. Let's Then move to Slide 10 and start to look at our business areas. So Construction and Services had a great quarter. Abel continues to grow both sales and EBITDA. Our team Suffering from project delays due to mainly the delay of supply of materials. Hence, lower sales was due to that many projects are in early phase and the lower sales is the main contributor to lower EBITA, although the profitability is actually slightly higher in hand. Natja had yet another great quarter with high growth of sales and EBITA. So all in all, good EBITA growth and a good quarter for Construction and Services. Let's move to Slide 11 and Business Area Consumer. Here, we had organic growth increased by 6.4%. Strong sales in KBD due to more and more cars are sold from own book instead of being broken. Strong EBITA growth as a result of the acquisition of Foshbase into KVD. It's a great quarter for KVD. Waste, Outdoors, very strong EBITDA growth in the quarter. And coming back to Stolt, this is due to unusually strong demand for their products, which has been is a result of really lower season stock clearance. And yet another strong quarter from Plantarsen with improved assortment mix and improved efficiency through the organization. So again, Strong quarter for Consumer as well. Let's move over to Slide 12, where we take a look at Business area. Industry continues to grow. However, in Diab, Sales was down 11%. That is due to the fact that the wind market sales It's down 28%. I think no one believes that Wind power is nothing for the future. The wind market will, over time, Continue to grow a lot. However, as you know, the wind and the energy Industry in total are dependent on political decisions and subsidies, etcetera. And they were taken away in China last year, which is the biggest market for wind, but we estimate these things to come back. Also, there have been increased costs For materials and the wind industry is going through a material shift in the wind blades That will go on in this year and next year. HHL display, yet another strong quarter, strong organic growth And one more add on acquisition in the quarter affecting only September, But it's important acquisition in Italy. Hay Shell is also impacted by cost on. Increases for freight and raw materials. Le deal shows fantastic growth, 42%. The order book is also very strong. And the Very strong increase of EBITDA is pure organic. GFS, As you know, has had a good year. Net sales was up 29%. We used to talk about the service revenue, which is excluding the pass through your pass through revenues. But the service revenues are up also up 21%. There's a small EBITA improvement in the quarter since Q3 last year Was impacted by release of extraordinary project provisions. So with that, we move over to an ever so important area, which is the sustainability topic on Page 13. During the quarter, our new Vice President for Sustainability and Communication, Josephine Upping, Join us and our management team, she brings extensive knowledge from senior positions in the banking industry to Ratus. And Josephine, I want to leave the word to you to talk about Sustainability, Anurag? Thank you so much, Jonas. And I'm very excited to be on board, of course, starting the 1st September. And so far, I can say that I am impressed with what I see. I mean, it's obvious that the companies in Ralvskruv contribute considerably to a long term sustainable development. And that is actually both in terms of development in a broader sense, but most important, the companies both And actually drive the development of current EUC trends. So we have listed some of the some really good examples on the slide. Two very tangible areas where the RAS companies are contributing is in the wooden industrial wooden construction area And also in the circularity in the plastic industry. And we can say that one of our proudest moments In the sustainability area in the quarter was the inauguration of the Sara Kulturhus in Kielesjo, which actually is the highest Heijn wooden building in Sweden. So that was a great moment for Akas and it's our contractor, Hen, Who was the main constructor for the project. And then, of course, we have Eibel, who continues to successfully transform towards becoming fully focused on renewable energy by the end of this decade, and that's a very impressive journey to follow. As I mentioned, the circularity in the plastic industry is a very important area. And there we can see both EVOL sorry, there we can see both DHEAV and HL display, which are participating in several development projects in the area. And last but definitely not least, during the year, Rathes has been working on a project with all the companies within the business group Targeting the EU taxonomy. And the aim with that project is to increase knowledge and align reporting. And I mean, it's very obvious that The EU taxonomy will set new standards and increase transparency, and this is a development we at RASM strongly support. Thank you, Stefan. And wood in buildings, I was down and visited the commission a couple of weeks ago, and it was a lot of talking about Buildings in wood being a very important factor to take down CO2 in Europe. And hence, They've been doing this since 2005, I think. And didn't they build the highest building in wood also in Norway? Actually, they did. So they have been part of 2 world records Actually, the highest wooden building in Norway and now the highest in names of, I think yes, the highest building in Sweden as well. So that's impressive. Thank you so much, Josephine. With that, we move to Slide 14 and our acquisition strategy and how we will succeed. As I stated earlier, our transformation from investment company to business group is now done. And our full focus is to continue the development in the companies, including acquisitions. So we are looking for 3 categories of acquisitions, The add ons, the adjacencies and the platform acquisitions. The add on acquisitions, we believe, is extremely value creating. They are and will be driven more and more decentralized by company driven processes, even though Ratatos provide specialist support. Our group companies, Since they have the size and brand, are often seen as natural consolidators. The add ons are usually bilateral processes, More attractive valuations, I think the last 2, we were around an EBITDA multiple of 5, And they contain a lower risk. We are and we love cost And revenue synergies by consolidating markets and companies. Adjacencies, they are normally identified by Ratatos. They target The same industry as current platforms we have today, we look for soft Synergies with cross pollinations, and some will be integrated, some will not over time. I think it's interesting to look what's happened between Hand and Vestia. So, Hans' CEO is in the Board of Vestia's Board and Vestager CEO is part of Hansford. And the partnership between these two companies It's becoming closer for each day that passes. And actually, a joint tender, quite a big one, was submitted for a partnering project just after Q3. Platform acquisitions, Here, we are looking for companies that are market leaders or have the potential to become 1. We look for sizable data and companies that can be a natural consolidator in a fragmented market. Markets are important to us. We want them to be Attracting and growing. However, we focus on high quality companies with a solid track record. We like companies who have been down, but we've been through a tougher business cycle in their health history, as an example, And of course, strong management teams. So next Slide 15 is What lies behind this strategy, our companies in general have a high cash conversion rate, which give us, of course, strong cash generation that can fund our And as Jonas Sorgre pointed out, I mean, we made acquisitions for some SEK 300,000,000 in the quarter. And still, in spite of the fact that we increased stock levels, etcetera, we had There's even stronger balance sheet after these acquisitions. In the coming years, Acquisitions will be a very important component in reaching or beating our EBITDA target for 2025. As Jona said, we have actually SEK 9,000,000,000 to spend today and still stay within our leverage targets. I'd also like to point out that we have a very strong team for acquisitions Here in Raffles. That team includes also 2 experienced legal M and A persons. Magnus was the head of legal M and A at MGG, Jacob was a colleague to me in my previous CEO role in EPRI, where we made some 70 acquisitions together with the team. I think all in all, the individuals in Draught have experienced from more than 150 acquisitions. On Page 16, if we move to that, Yes. A summary of or I'm not going to go through all of this. Just to note That we have made 1 adjacent acquisition in Investia and 5 bolt ons. And in Q3, we added SEK 1,000,000,000 in yearly revenue. And in total, We have added so far this year SEK 1,900,000,000. So with that, Page 17, short summary. Strong order intake in the quarter, up 32%, positive organic sales 2%. EBITA continues to increase in our company group, 9 out of 12 companies improved their EBITA. 6 actually were Some 60% EBITDA growth or more. Cash flow impacted by inventory buildup And leverage is improving. And yet again, acquisitions have been performed. And we have a strong funding for a higher power, strong competence. So we look very positive on the future. We have an exciting period in front of us. Thank you so much. Only. Okay. Now let me see where is the first question. Okay. So we have Jaime Max from ABG. You asked could you just remain on how big the e commerce is of Plantation's total sales? In the quarter, it's about 3.4%. I think it's SEK 160,000,000. Jonas Oberp is the number. So it's still a small proportion of the sales, but it has increased a lot during this year. Then, Georg Apling from Pareto. Hi, Georges. Leverage is now significantly below target. Can we expect M and A activity to pick up and or extra dividends so that the leverage moves toward the target. Well, Absolutely. We do have a high M and A activity. I mean, we acquired 2 companies. But what I mean with high M and A Activity is that we are evaluating a high, high number of acquisitions targets. But we are also very selective. But absolutely, it looks very good for the future. Sorry, I missed one More question from Max in the component shortage and shipping cost. What is the status for Q4? Has it improved or worsened? I would say it hasn't worsened. It hasn't really improved. It's sort of flattening out. And we expect those things to be affecting also Q1, But we don't see any growth here. And we see vaccination level, which affects us as well, are increasing in the quarter. So that is getting better and better. And I think the other have flattened out and maybe will decrease. We can hope for that. But But it's very important for us to match this with cost increases to our end clients. And that's process that takes some time and that more will happen on that in Q4. And we don't have any audio questions at this point. Yes. I have another question Here from Peter Lindval, Cavalier. Strong balance sheet and low valuation on the Ratlof stock. Have you considered buybacks to increase shareholder value. This is, of course, a board issue, but we have an ambition acquisition agenda. So our goal is to, of course, increase shareholder value by using our strong balance sheet to make more really great acquisitions. No more questions. In that case, I want to thank you for participating in this call. And Don't hesitate to contact Josephine or Jonas or me for any questions that might come up later. Thank you so much. This concludes the conference call. Thank you all for attending. You may now disconnect your lines.